The Federal Reserve made a landmark announcement on Thursday, rolling out the FedNow® Service, a new system that will enable instant payments. This move is expected to overhaul the banking sector, allowing banks and credit unions of all sizes to instantly transfer money on behalf of their customers 24/7.
Unlike consumer applications that enable instant peer-to-peer transactions, FedNow® isn’t a retail facing app in the traditional sense, it is a payment rails system that will enable banks with the ability to instantly move customer funds. More than 50 financial institutions, including powerhouses like JPMorgan Chase, Wells Fargo, and Peoples Bank, have jumped on board as “early adopters” of FedNow®.
We took a look at the back end and it looks like FedNow is basically “instant messaging” instead of “sftp of files” which is how ACH transfers have been traditionally facilitated.
Federal Reserve Chair Jerome H. Powell has stated, “The Federal Reserve built the FedNow® Service to help make everyday payments over the coming years faster and more convenient.” Further explaining additional advantages, such as immediate receipt of paychecks and swift access to funds upon invoice payment.
This development implies that interbank transfers, like moving money between checking and savings accounts, could occur in real-time. It would allow gig workers, like Uber drivers, to receive payment instantaneously after each ride. However, this also entails an extensive “record” of every transaction, raising privacy concerns and echoing fears of “big-brother” surveillance. The launch of FedNow® has sparked apprehension, with critics suggesting it could be a stepping stone towards a Federal Central Bank Digital Currency (CBDC), despite the Federal Reserve’s assertion that any move to issue a CBDC would necessitate authorizing legislation.
The FedNow® Service has seen early adoption by 35 financial institutions, including the U.S. Department of the Treasury’s Bureau of the Fiscal Service. Furthermore, 16 service providers are prepared to support payment processing for banks and credit unions.
The new system is set to assist in streamlining cash flow management by eliminating processing delays. It will enable consumers to receive paychecks instantly and leverage these funds on the same day. Small businesses may also benefit, with increased capability to manage cash flows.
FedNow® Service, an interbank payment system, is slated to operate in conjunction with other longstanding Federal Reserve payment services such as Fedwire® and FedACH®. The Federal Reserve is committed to working with over 9,000 banks and credit unions across the country to gradually roll out this service to their customers.
The FedNow innovation has not been met without controversy and concern. In retrospect it appears the Chokepoint 2.0 initiative may have been a strategic move to eliminate unwanted competition to the new program. Critics have argued that this may have affected the competitive landscape of the financial sector. We also have serious concerns about the impact and surveillance FedNow will impose on American citizens.
With this latest venture, the Federal Reserve signals a profound shift in the American financial landscape. As financial institutions chart their course in this redefined digital territory, the advent of real-time transactions via FedNow® foretells an era of speed, efficiency, and convenience in banking. But what additional initiatives are looming?
The future of FedNow and consumer surveillance remains to be seen but we can’t discuss the new payments system without adding in a plug for Bitcoin. You can still buy Bitcoin with cash at one of our Bitcoin ATM’s near you
